Study Finds the Odds Favor IRS in Supreme Court Tax Cases

The odds are stacked against corporations whose disputes with the IRS go all the way to the Supreme Court, according to a new study by Joshua Blank, faculty director of the graduate tax program at NYU law school, and Nancy Staudt, a tax scholar at the University of Southern California, Gould School of Law.

Their study, titled "Corporate Shams," found the government prevailed more than six times out of ten in high court cases where it argued that corporations actively abused the tax code.

"Judicial decision making in this area of the law is erratic and unpredictable," the study said, adding that the report sought to elucidate "where courts draw the line between legal and fraudulent behavior" involving a tax code that has gray areas. The study said its findings "can be exploited by both government and corporate attorneys."

Following are some of the study findings:

Talking Points

What if a client has met with an IRS field agent and the Appeals Office of the IRS and still wants to take a tax issue to a higher court? Tax Partner at WithumSmith+Brown David A. Springsteen, CPA, MBA, suggests you consider the following when advising your client:

Remember – the IRS doesn't want to go to court if they don't think they can win a case.

How strong are the client's facts? Obviously, this is crucial when taking a case to a higher court.

Does the client want to spend the money involved in going to trial? If the amount at issue is around $10 thousand, maybe not; however, if it's more like $10 million, it could be worth the expense for your client to proceed.

The government won 61 percent of the 137 cases heard by the Supreme Court from 1909–2011 that involved allegations by the federal government of abusive tax-motivated transactions by corporations.

The government won 68 percent of the time in tax disputes with corporations in which the government alleged a misreading of the tax code rather than abuse.

The government's chances of winning cases of alleged abuse increase when there are discrepancies between a corporation's internal books and its returns filed to the IRS.

The government's chances of winning increase in instances when a corporation claims it is owed a refund but has not been audited or challenged by the IRS.

The presence of one of two factors appears to give corporations the upper hand: (1) third parties, such as partnerships that are directly involved in the economics of the disputed transactions; or (2) complex transactions that contain multiple financial steps.

The government's odds of winning go up to 50 percent when a corporation has both a third party and a multistep transaction, compared with when just one of the factors is present.

More than one in three of all corporate tax controversies that reached the Supreme Court from years 1909–2011 involved allegations by the IRS or Justice Department lawyers of abusive use of the tax code.

Of the 919 federal taxation disputes heard by the high court from 1909–2001, 137 cases of the total 364 cases that concerned corporations involved abusive or highly questionable tax shelters and similar structures.

The sixty-nine-page study, parsing more than a century of public data, will be published in the New York University Law Review in December, a spokeswoman for the NYU law school said.